Equity markets kick started the week on a negative footing, with the troubled Iberian giant back in focus after it was reported that the ECB is checking whether it may have contravened its own strict rules by lending to Spanish banks on overly generous terms, an ECB spokesman said on Sunday. According to press reports, Spanish banks had borrowed funds from the ECB at a preferential interest rate of 0.5% even though the creditworthiness of the T-bills they provide as collateral should have required them to pay 5.5%. The never-ending Greek drama is another factor for the risk-averse sentiment, with only weeks before the country runs out of cash and still no evidence that lawmakers will find a solution to diffuse the situation, there is a risk of another speculative attack on weaker EU states. As a result, credit and bond yield spreads widened, led by Italian and Spanish bonds, both wider by around 9bps in 10s. Despite the evident distress in credit markets, EUR/GBP is essentially flat, with GBP underperforming following the lacklustre PMI report from the UK.

Asian Headlines

Both the Shanghai Composite and the Nikkei 225 closed with losses, as investors sat on the sidelines ahead of the key risk events of the week being the US Presidential elections and the Chinese leadership handover. The Nikkei 225 closed lower by 0.5% at 9,007, with the Shanghai Composite closing down 0.14%. The moves come despite Chinese non-manufacturing and HSBC services PMIs both showing growth in their respective sectors.

Chinese Official Non-Manufacturing PMI (Oct) M/M 55.5 (Prev. 53.7)

Chinese HSBC Services PMI (Oct) M/M 53.5 (Prev. 54.3)

US Headlines

Fed's Williams said the Fed has substantial scope to use monetary policy to stimulate the economy without igniting inflation and sees GDP growth at 2.5% in 2013 and 3.5% in 2014. (Newswires) He added that policy measures are having the desired effects and the Fed's focus on boosting jobs does not mean it puts less importance on price stability.

Latest Ipsos poll on the US Presidential race shows Obama at 48% vs Romney 47%, however, state polls give Obama an edge in Ohio, Pennsylvania, Virginia, Colorado, Wisconsin. (Newswires) A separate survey by the Pew Research Center, one of the more reliable pollsters, showed Obama leading Romney 48% to 45% among likely voters.

Italian statistics office ISTAT sees 2012 GDP at -2.3% and 2013 GDP at -0.5%, but still sees a recovery in the second half of 2013.(Newswires)

The ECB is checking whether it may have contravened its own strict rules by lending to Spanish banks on overly generous terms, an ECB spokesman said on Sunday. (Telegraph) German newspaper Die Welt am Sonntag, citing the results of its own research, said Spanish banks had borrowed funds from the ECB at a preferential interest rate of 0.5% even though the creditworthiness of the T-bills they provide as collateral should have required them to pay 5.5%.

Equities

European equities opened with losses and have continued the trend throughout the European morning, with the periphery underperforming ahead of the key risk events this week coming from all corners of the globe. The oil & gas and telecommunications sectors are taking the brunt of the losses with the best-performing healthcare sector not spared from the risk-off tone, heading into the North American cro ssover down 0.2%. Global banking titan HSBC reported during market hours this morning, Q3 underlying pre-tax profit of USD 5.0bln vs. Exp. USD 5.6bln and also made a USD 800mln provision for US money laundering probes, with a USD 353mln provision for UK consumer redress. After the initial volatility in their share price, HSBC head through the midpoint of the European session down 1.6%.

FX

The EUR took losses from the European open this morning, with a lot of focus on the European fixed income markets, as the German 2y yield moved into negative territory, and the Italian 10y yield breached 5% to the upside. Flight to quality dominated early trade, with the USD-index moving to two-month highs early in the day. The EUR/USD has settled below the 1.28 handle at the midpoint of the session, with GBP/USD breaking 1.60 to the downside. The moves come alongside the slide in European equities, as participants look for safe havens heading into the US elections and the Greek austerity bill vote.

Commodities

WTI and Brent crude futures trade little changed ahead of the NYMEX pit open, with WTI below the USD 85.00 handle. The energy complex was seen in negative territory for much of the morning, but have reclaimed much of their losses as the USD-index came off its strongest levels. Spot gold and silver also trade close to their opening levels, moving in line with the broader commodities markets.